Question
You own a coal mining company and are considering opening a new mine. The mine itself will cost $117.6 million to open. If this money
You own a coal mining company and are considering opening a new mine. The mine itself will cost $117.6 million to open. If this money is spentimmediately, the mine will generate $19.1 million for the next 10 years. Afterthat, the coal will run out and the site must be cleaned and maintained at environmental standards. The cleaning and maintenance are expected to cost $1.8 million per year in perpetuity.
a. What does the IRR rule say about whether you should accept thisopportunity?
b. If the cost of capital is 7.9%, what does the NPV rulesay? (Round to three decimalplaces.)
c. The plot of the NPV as a function of the discount rate is n shaped. It intersects the x-axis at r=2.94% and r=8.04% What does the NPV rulesay? (Select the best choicebelow.)
A. Reject the project because the NPV is negative.
B. If the opportunity cost of capital is greater than r=8.04%, the investment should be undertaken.
C. If the opportunity cost of capital is between r=2.94% and r=8.04%, the investment should be undertaken.
D. If the opportunity cost of capital is less than r=2.94%, the investment should be undertaken.
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